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Device makers push to repeal tax

March 13th, 2017

Clock ticks on suspension as medical device manufacturers push for permanent repeal of tax

By Bridgett Hernandez | KPC News

Members of the Indiana Medical Device Manufacturers Council traveled to Washington, D.C., earlier this month to talk to members of Congress about issues that affect the medical device industry in the state — chief among them the 2.3 percent medical device tax.

Council members, including representatives from Zimmer Biomet, Johnson & Johnson/DePuy Synthes, Boston Scientific, Roche Diagnostics, Cook Medical and Genesis Plastics Molding, are hoping for a permanent repeal of the tax — and soon. A two-year suspension on the tax, which was designed as a funding mechanism for the Affordable Care Act, is set to expire at the end of this year.

According to a 2015 report from the Congressional Research Office, the tax was estimated to have “fairly minor effects, with output and employment in the industry falling by no more than two-tenths of 1 percent.” But opponents to the tax argue that it has had more far reaching effects.

Indiana Congressman Jim Banks, R-3rd, has urged Congress to make a permanent repeal of the medical device tax a legislative priority. In a Jan. 31 letter to House Speaker Paul Ryan signed by Banks and 17 other legislators, he made a case for H.R. 184, Protect Medical Innovation Act, which would permanently repeal the medical device tax.

“Our legislation to permanently repeal this tax would provide the certainty needed for the medical device industry to continue its research and investment in these critical life-saving innovations,” the letter said.

Banks argued that the tax subjects the U.S. medical device industry to one of the highest corporate tax rates in the world, which hinders research and development. He said that northeast Indiana, primarily Warsaw, which falls in Banks’ congressional district, is often referred to as the orthopedic capital of the world and would benefit from the removal of the tax.

“This undermines the future of the industry and puts the discovery of new breakthrough medical technologies at risk,” the letter said.

Chris Cerone, vice president of global government affairs for Zimmer Biomet, said the tax is bad policy because of its negative impact on jobs and innovation, citing data from the U.S. Department of Commerce that said the medical device industry lost 29,000 jobs between 2012 and 2015 when the tax was in place, a 7.2 percent decrease.

While the orthopedics giant conducts business activities on a global basis, most of the company’s research and development takes place at its headquarters in Warsaw, Cerone said.

“Warsaw is by far the largest R&D facility that we have in our enterprise,” he said. “In Warsaw, we have more than 50,000 square feet of lab space where we conduct our R&D activities.”

Worldwide, Zimmer Biomet’s research and development employ 2,000 people, and its efforts focus on biomechanics and biomaterials.

Cerone said the tax forced companies, including Zimmer Biomet, to put existing research and development projects on hold or to refrain from undertaking new projects.

He said to understand what the landscape might look like under a permanent repeal, one only has to look at what has been happening since it was suspended.

“It essentially freed up revenue to invest back in the business,” he said. “For us, we’ve been able to plow some of that suspension revenue into new R&D, new equipment and even new investments in startup companies that are really undertaking a lot of exciting innovation in the orthopedics space.”

Cerone said Zimmer Biomet increased its R&D spending as a percentage of sales from 4.5 percent in 2015 to 4.8 percent in 2016 and said that a permanent repeal of the medical device tax would allow that trend to continue.

Kathy Heuer, executive director of Indiana Medical Device Manufacturers Council, said the medical device tax makes it hard for companies of all sizes to be able to plan ahead.

According to Heuer, Cook Medical in Bloomington had plans for five new plants and shelved all of them because of the tax. That’s a lot of decent-paying jobs, she said, adding that the average job in medical device manufacturing now pays more than $86,000.

In northeast Indiana, OrthoPediatrics, a manufacturer based in Warsaw that makes orthopedic implants for children, also had to shelve new projects because of the tax.

Heuer said the tax has had a bigger impact on small and midsized companies than it has on larger companies, because it taxes revenue, not profits.

“If you’re a young, startup company, and you’re not even profitable yet, you still have to pay the tax,” she said. “I know that one of our companies in Columbia City had to go out and borrow the money to pay the tax — close to a quarter of a million dollars.”

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